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Elara Capital
Gujarat Gas (Buy)
CMP: ₹153.35
Target: ₹180
Our analysis shows strong demand for industrial piped natural gas (PNG) for Gujarat Gas is imminent, given increased competitiveness of liquefied natural gas (LNG) over fuel oil (FO) & imported coal and regulatory push by the recent National Green Tribunal (NGT) order to shut coal gasifiers used by Morbi’s ceramic tiles manufacturers and switch to NG. The company had posted sales volume growth of 14 per cent y-o-y in FY15 (when the court ordered Morbi ceramic players to switch to NG) and 17 per cent y-o-y in FY18 (when LNG became competitive over fuel oil and imported coal).
We believe the company will benefit from competitive LNG prices over FO and reducing LNG price gap over imported coal, resulting in a rise in long-term EBITDA/scm margin to ₹4.3/scm from ₹4.2/scm. We reiterate ‘Buy’ and raise our target price to ₹180 from ₹160. We assume gas sales volume at 6.7 mmscmd in FY19E, 7.9 mmscmd for FY20E and 9.4 mmscmd for FY21E. Our new target price is based on a DCF method, with a 10.5 per cent WACC (unchanged), a 15 per cent volume CAGR during FY19-24E, 4 per cent long-term demand growth and implied 19.8x FY21E P/E.
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